Impact of Interest rate Increase on Multiples

June 07, 2022

by an intermediary from University of Memphis in 5000 Linbar Dr, Nashville, TN 37211, USA

Curious if brokers and searchers are seeing any reduction in acquisition multiplies as interest rates increase? This is not only related to the initial rates, but the buyer's concern of the impact on cash flow as rates could rise over the###-###-#### year term for the senior note.

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Reply by a searcher
from Duke University in Tulsa, OK, USA

I have yet to see any changes in Seller expectations. For example, I have a LOI on the table for a company that expires this Friday which specifically stated I was expecting a SBA loan with an interest rate of 6% or less. Yesterday I tried to put pressure on the broker to move forward by telling him that if interest rates increase in the next few months I would need to adjust my offer accordingly in order to keep a safe debt service coverage ratio (DSCR), unfortunately it didn't seem to make an impact. I believe the smart money should and will be reducing their offers as the cost of financing a deal increases over the next several months. I suspect it will take time before the Sellers adjust. Unfortunately for deals within the SBA loan space there are many less sophisticated buyers who will be a wild card.

Reply by an intermediary
from University of Memphis in 5000 Linbar Dr, Nashville, TN 37211, USA

Thanks for sharing your thoughts on the impact of interest rates. We agree that the impact is not immediate, but we see individual buyers concern growing because their cashflow is impact and the debt coverage ratio is impacted if there is not some corresponding price reduction in the purchase price. Sellers have not lowered their valuations, so we expect to see some difficulty in transactions that tight from a financing standpoint. We normally see seller financing as punitive from a cashflow perspective as seller notes are normally five years or less, but possibly one solution is to leverage commercial rate increases to obtain better rate and longer term from the seller.

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